Stock market analysts at MoffettNathanson have been cautious on the Towers sector for reasons that include: valuations that struck them as full; their exposure to rising rates, a view that 5G wouldn’t be a panacea; and risks associated with DISH Network. The firm issued a report yesterday, however, that encouraged investor participation by raising the grade of towers to “Outperform.”
“In light of the stocks having significantly underperformed the market over the past few years and with the valuation multiples having compressed noticeably, we believe the Towers now offer appealing upside with meaningful downside protection,” said analyst Nick Del Deo. “We are upgrading all three to Outperform from Neutral, based on our forecasts.”
Del Deo said the stocks appear poised to return low-teens annual total returns through year-end 2026 (vs. ~7-8 percent estimated costs of equity) if their current Sprint-adjusted multiples remain steady during that time frame.
“There would obviously be upside if the multiples expand,” Del Deo said. “Conversely, multiple compression of about five turns from current levels would still yield low to mid-single digit annual total returns during that time, which strikes us as an appealing cushion.”
Del Deo admitted to a long bias toward SBA, given its high domestic tower contribution, capital allocation policies, and the quality of its numbers. However, he would currently judge the appeal of all three names to be quite similar.
“We still like those attributes of SBA, but in a leasing environment where carriers appear unlikely to upsize their 5G investment plans and DISH Network seems set to struggle establishing itself as a viable, financially healthy customer, the holistic master lease agreements (MLAs) that American Tower and Crown Castle have in place with the incumbents, as well as the ways in which their deals with DISH Network are structured, may drive somewhat better leasing results than SBA over the next several years,” he said.
If they’re wrong, Del Deo said, and the carriers aggressively densify their networks to support 5G use cases and/or DISH Network gains significant traction, SBA would likely have the most upside to their forecasts. The risks facing the Towers, he said, strike them as manageable in light of their current valuations.
“While we believe DISH Network will continue to deploy its network to fulfill its regulatory requirements,” he said, “we don’t see the business becoming financially healthy over time. This introduces risk for the Towers. However, an outcome where DISH Network’s spectrum winds up in the hands of better-capitalized players would likely be a long-term positive. Moreover, the structure of Crown Castle’s and American Tower’s MLAs with DISH Network help insulate them from the risk of fluctuations in its leasing.”
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